Disclosures & fees

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Agents are the employees of broker-dealers or issuers that facilitate securities transactions for
customers. Let’s refresh ourselves with the legal definition of an agent according to the Uniform
Securities Act (USA):
Definitions
Agent
Any individual who represents a broker-dealer or issuer in effecting or attempting to effect
purchases or sales of securities
Similar to broker-dealers, agents must go through a registration process in order to legally
operate in a state (unless an exemption or exclusion exists). The process is generally similar, but
there are some important differences to keep track of.
Agents utilize Form U4 as their registration form with each applicable state administrator.
Disclosures required to be made on Form U4 and additional obligations include:
 Name and any nicknames
 Current address
 List of all current registrations
 Employment & residential history
 Criminal events
 Regulatory events
 Court actions
 Financial disclosures
 Payment of filing fee
Name & current address
This disclosure is straightforward and simple. Applicants must provide their name, plus any
nicknames they go by. Additionally, their current residence must be provided.
List of all current registrations
Depending on the business model an agent follows, they may be registered in one or numerous
states. If an agent is already registered in other states while applying in a new state, they’ll list
those registrations on Form U4. This provides the state administrator with context in regard to
the scope of the agent’s operations.
Although agents may be registered in multiple states, they’re generally barred from registering
with more than one broker-dealer or issuer. There are two exceptions to this rule. First, an agent
could be registered with multiple broker-dealers or issuers if those firms were affiliated. For
example, John could be registered with ABC Brokerage and XYZ Brokerage if both brokerage
firms were subsidiaries of the same parent company (part of the same larger organization).
Second, the state administrator has the power to grant an exception allowing multiple
registrations with unaffiliated broker-dealers or issuers.
Employment & residential history
Employment and residential history are important disclosures to obtain from persons applying
for agent registration. Employment history becomes publicly available information, providing
insights into a registered person’s background. Think about it - if you entrusted an agent with
handling your finances, you’d probably want to know the extent of their industry experience.
Also, what if the agent was previously employed by a firm known for stealing client funds? This
information is publicly disclosed on FINRA’s BrokerCheck system.
The required employment and residential disclosures are:
 10 years of employment history
 5 years of residential history
Criminal events
The state administrator also wants to know about previous criminal history. Let’s take a look at
the specific language on Form U4:
Have you ever:
 been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic,
foreign, or military court to any felony?
 been charged with any felony?
Have you ever:
 been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign
or military court to a misdemeanor involving: investments or an investment-related
business or any fraud, false statements or omissions, wrongful taking of property,
bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of
these offenses?
 been charged with a misdemeanor [as specified above]
Gaining knowledge of an applicant’s criminal history is important given registered persons gain
access to the assets of the investors they engage. Would you feel comfortable placing a trade
with an agent that had a long criminal history of theft? To ensure investors maintain confidence
in the financial markets, the state administrator typically does not register persons with a recent
criminal history. The first step to determine if someone will be barred is obtaining their history,
which is why Form U4 requests the information listed above.
All relevant criminal events (including charges) must be disclosed, regardless of how long ago
the event occurred. However, only felony and securities-related
misdemeanor convictions within the past 10 years can prevent an applicant from being
registered. Known in the industry as a statutory disqualification, an applicant reflecting this in
their recent history would have their registration request denied. If a currently registered agent
was convicted of any felony or a securities-related misdemeanor while employed in the
industry, their registration would likely be revoked by the state administrator. We’ll learn more
about the powers of the state administrator later in this material.
Regulatory events
The state administrator is not the only regulator in the financial markets. The Securities and
Exchange Commission (SEC) and FINRA both exercise regulatory authority over the securities
markets. The Commodity Futures Trading Commission (CFTC) regulates the futures markets.
There are many others (both domestic and foreign), but you don’t need to know them by name.
Although the state administrator is the primary regulator enforcing state securities laws and
regulations, actions taken by regulators of all shapes and sizes are required to be disclosed on
Form U4. The specific language on the form requests the following:
Has [any domestic or foreign securities regulator, financial regulator, state or federal agency]
ever:
 found you to have made a false statement or omission?
 found you to have been involved in a violation of its regulations or statutes?
 found you to have been a cause of an investment-related business having its
authorization to do business denied, suspended, revoked, or restricted?
 entered an order against you in connection with investment-related activity?
 imposed a civil money penalty on you, or ordered you to cease and desist from any
activity?
 found you to have willfully violated any provision of [securities laws]?
 found you to have willfully aided, abetted, counseled, commanded, induced, or procured
the violation by any person?
 found you to have failed reasonably to supervise another person subject to your
supervision?
Registration applications tend to be looked at closer if any of the items listed above are
disclosed. However, it may not prevent an applicant from gaining registration as an agent. The
administrator tends to approach these situations on a case-by-case basis.
Court actions
In addition to regulators, court systems can take action against persons. Those actions must be
disclosed on an agent’s application for registration. Let’s take a look at what’s specifically
requested on Form U4:
Has any domestic or foreign court ever:
 enjoined you in connection with any investment-related activity?
 found that you were involved in a violation of any investment-related statute(s) or
regulation(s)?
 dismissed, pursuant to a settlement agreement, an investment-related civil action
brought against you by a state or foreign financial regulatory authority?
Definitions
Enjoined
To legally prevent a person from engaging in a particular action or activity
It goes further:
Have you ever been named as a respondent/defendant in an investment-related, consumer-
initiated arbitration or civil litigation which alleged that you were involved in one or more sales
practice violations and which:
 is still pending, or;
 resulted in an arbitration award or civil judgment against you, regardless of amount, or;
 was settled
In general, any court-related actions relating to securities taken against a person must be
disclosed on registration applications. It’s possible the disclosure could result in the denial of a
registration request (depending on how bad the situation was).
Financial disclosures
Prospective agents also must disclose certain financial events in their background. This is what’s
asked on Form U4:
Within the past 10 years:
 have you made a compromise with creditors, filed a bankruptcy petition or been the
subject of an involuntary bankruptcy petition?
 based upon events that occurred while you exercised control over it, has an organization
made a compromise with creditors, filed a bankruptcy petition or been the subject of an
involuntary bankruptcy petition?
 based upon events that occurred while you exercised control over it, has a broker or
dealer been the subject of an involuntary bankruptcy petition, or had a trustee
appointed, or had a direct payment procedure initiated under the Securities Investor
Protection Act?
Don’t worry too much about the details, but an agent must disclose any bankruptcies or
compromises with creditors (agreeing to pay an amount lower than was originally owed) within
the last 10 years.
Payment of filing fee
As with any other person going through the registration process, a filing fee must be paid. If not
included, the registration request will be denied. Similar to broker-dealers, the initial
registration only lasts until the end of the year (December 31st), and the fee is not prorated.
Additionally, a renewal request and fee must be submitted before January 1st to avoid a lapse in
registration.
Sidenote
Automatic registration of certain agents
Generally speaking, all broker-dealer employees engaging in securities transactions must be
properly registered. As we discussed thoroughly in this chapter, the primary way to obtain
registration is through filing disclosures on Form U-4. However, not all agents are subject to this
process.
We previously discussed the requirement for broker-dealers to disclose their controlling
affiliates on Form BD (the broker-dealer registration form). As a reminder, a controlling affiliate
is any officer, director, partner, or person owning a significant portion of the firm. These
individuals must register if involved in any securities-related business, but are not required to
submit their own registration documents.
Instead, their information is exclusively disclosed on Form BD, and the controlling affiliate is
registered “alongside” the broker-dealer. There is no need for these individuals to submit a
separate Form U-4 as they are granted effective registration at the same time as the broker-
dealer.
Key points
Form U4
 Registration form for agents
 No separate Form U-4 filing for controlling affiliates
 o Registered through Form BD
Agent registration disclosures
 Name and any nicknames
 Current address
 List of all current registrations
 Employment & residential history
o 10 years of employment history
o 5 years of residential history
 Criminal events
o Only applies to felonies or securities-related misdemeanors
o Any charges, guilty pleas, no contest pleas, or convictions must be disclosed
o Convictions in the past 10 years may prevent registration
 Regulatory events
 Court actions
 Financial disclosures
o Bankruptcy filings
o Compromises with creditors
 Payment of filing fee